Exchange traded funds (ETFs) dealing in currencies have given investors exposure to this area of the market that was previously a challenge to gain access to.

Many investors, however, lack familiarity with the mechanics of the currency markets, reports Don Dion for Fidelity Adviser. What makes a currency strong or weak? Is a strong dollar a good or bad thing?

You may have noticed the dollar gaining ground this week, but is this momentum going to continue? There are several factors that will affect the movement of the dollar, but the most important is the interest rate that the Federal Reserve sets up every six weeks. Remember that higher rates support a strong dollar, and lower interest rates give way to a weaker dollar.

The rate cuts of 2007 have been on hold and if the economy can gain a foothold and stabilize along with a strong employment outlook for a few quarters, then expect the Fed to raise the key Federal funds rate from its current level of 2.0%, giving way to a stronger U.S. dollar.

When the dollar loses value, it affects things in a different way: U.S. goods become more competitive in the global marketplace and commodities denominated in dollars (such as oil) tend to go up in price. It’s a simple matter of the exchange rate.

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